C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000891
SIPDISSIPDIS
STATE FOR EUR/NB, EUR/NCE, EB/ESC
STATE PLEASE PASS TO FEDERAL TRADE COMMISSION
DOE FOR HARBERT
DOC FOR 4231/IEP/EUR/BOHIGIAN
NSC FOR GRAHAM, MCKIBBEN AND COEN
TREASURY FOR LOWERY, LEE AND COX
E.O. 12958: DECL: 08/24/2021
TAGS: ENRGEPETPREL KZ VELH
SUBJECT: RUMORS CONTINUE TO SWIRL ABOUT THE FATE OF
LITHUANIA'S OIL REFINERY
REF: VILNIUS 801 AND PREVIOUS
Classified By: Pol/Econ Section Chief Rebecca Dunham for reasons 1.4 (b
) and (d).
Â¶1. (C) SUMMARY: Rumors about the fate of Lithuania's
Mazeikiu Nafta (MN) oil refinery continue to circulate. Most
of them appear false. A front-page article in Lithuania's
largest newspaper proclaiming that MN was "sliding again into
Moscow's hands" was a near-total fabrication, according to
one of our most reliable sources on MN issues. MN's Board of
Directors unexpectedly voted four to three on September 22 to
reject a proposed long-term supply contract with Venezuela,
complicating management's efforts to diversify supply away
from Russia. Local press also reports that PKN is concluding
its pre-notification consultations with EU competition
authorities and will officially submit its application to
purchase MN within two weeks. END SUMMARY.
-----------------------------
A BOUGHT-AND-PAID-FOR ARTICLE
-----------------------------
Â¶2. (C) An article alleging that the Polish oil company PKN
Orlen -- which is currently finalizing arrangements to buy MN
from Yukos and the GOL -- was preparing to transfer a portion
of MN's shares to Russia's LUKoil is "total nonsense,"
according to Saulius Specius, adviser to the prime minister
on energy issues and one of our most reliable sources on MN.
The article, which appeared on the front page of Lithuania's
largest-circulation daily (Lietuvos Rytas) on September 23,
also alleged that a "prominent Lithuanian woman" would
receive USD 100 million in an offshore account if the
transfer of shares to LUKoil went well. Our local staff
interpreted this woman to be former PM Brazauskas's wife,
Kristina, the subject of speculation about her links with
LUKoil. MN Chairman Nerijus Eidukevicius, however, told us
that he thinks the reference was to a Social Democrat party
member, whom he did not wish to name.
Â¶3. (U) PM Kirkilas also flatly denied that PKN was preparing
to sell MN shares to LUKoil in a public statement on
September 26. He announced that he will meet PKN president
Igor Chalupec in Vilnius to discuss the article's
allegations. (Chalupec is already in town.)
Â¶4. (C) Specius told us on September 25 that the journalist
who wrote the article (Ramune Sotvariene) called him several
times before publishing the story. He said that he explained
repeatedly that PKN's contract with the GOL prohibits any
transfer of shares in the near future (he thought five years,
but wasn't sure) and prohibits indefinitely the possibility
of PKN selling or transferring part of the shares. After the
transfer-prohibition period lapses, Specius explained, PKN
can sell only the entirety of its stake in MN (approximately
85 percent of MN's shares), not portions of it. Even
further, he emphasized, any sale or transfer would require
the consent of the GOL, as the contract recognizes MN as a
"strategic asset" whose sale requires a national security
review by the GOL. Specius said that the contract --
negotiated under English law and enforceable in English
courts -- very clearly prohibited the type of transfer
described in the article.
Â¶5. (C) Queried on the source of the article, Specius opined
that the Kazakh state-owned energy firm KazMunayGaz (KMG)
likely paid to have it written. He said that the KMG team
that attempted to negotiate KMG's purchase of MN earlier this
year failed to present KMG's final offer for MN on time,
effectively leaving PKN as the sole remaining bidder. This
team (which includes one of President Nazarbayev's in-laws),
he said, is now trying to save face by portraying PKN as an
untrustworthy partner and scuttling the MN deal.
Â¶6. (C) Nerijus Eidukevicius, chairman of MN's Board of
Directors, told us much the same thing on September 26. He
said that PKN could not transfer any shares to LUKoil or
anybody else without the agreement of the GOL. He said that
a KMG rep was in Vilnius to negotiate a supply agreement with
VILNIUS 00000891 002 OF 002
MN the night before the article appeared and suggested that
the article may have been intended to support KMG's
last-ditch efforts to win this contract.
------------------------------
POSSIBLE SUPPLY DEAL SHOT DOWN
------------------------------
Â¶7. (C) MN General Director Nelson English told the Ambassador
on September 23 that MN's Board of Directors rejected a
proposed long-term supply contract with Venezuela. English
personally negotiated the agreement with the Venezuelans,
which would have mitigated MN's supply problems stemming from
the July 29 shutdown of the crude pipeline from Russia.
While the three GOL directors supported the deal, the four
Yukos-appointed directors voted against it. English
suggested that the Yukos-appointed directors were "doing the
Russians' bidding."
Â¶8. (C) Specius told us that he was at first unsure of the
Yukos directors' motives, but his concern was mitigated when
he learned more about the reasons for their decision. He
said that one or two of them had previously worked on oil
projects in Cuba and had first-hand experience dealing with
the Venezuelans, who proved themselves undependable by
providing crude of wildly varying quality. Specius added
that the Yukos directors were not opposed to obtaining
Venezuelan oil on the spot market, but felt that a long-term
contract with an unreliable supplier would not be in MN's
best interest.
Â¶9. (C) Eidukevicius, who chaired the meeting, told us that he
detected personal animosity between the Yukos directors and
English. He said that the Yukos directors believed that
English had conducted the negotiations with the Venezuelans
without consulting board members, and they were not happy
with being kept in the dark. At one point, Eidukevicius
said, English and one of the Yukos directors were literally
yelling at each other.
Â¶10. (C) Eidukevicius said that, enmity aside, the main reason
for the board's rejection of the deal was that a long-term
(five-year) contract with the Venezuelans would dissuade the
Russians from ever repairing the pipeline that used to supply
MN. He added, however, that two of the board members were
participating by telephone from Russia (and a third from
Riga), which may have prevented them from speaking freely.
He said that he did not have the feeling that the Yukos
directors were unduly influenced by LUKoil or other Russian
interests, but could not completely discount the possibility.
-------------------
STATUS OF EU REVIEW
-------------------
Â¶11. (C) Local press and our sources say that PKN is only now
finishing up its pre-notification consultations with the EU's
DG-Comp and will apply formally for approval of its purchase
of MN within two weeks. Because of the extensive advance
consultations PKN has done, our contacts claim that the deal
will sail through quickly (i.e., within the span of about one
month).
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COMMENT
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Â¶12. (C) There are still many players outside of this deal who
want it to fail. We therefore expect these kinds of rumors
to continue at least until PKN finalizes its purchase of the
refinery. What is disturbing about this episode is that
Lithuania's "paper of record" seems to have served as a
vehicle for deal-breaking disinformation.
CLOUD